Countrywide Financial Corp. on Tuesday said second-quarter profit fell 28 percent because the amount of loans that it retained in its own portfolio rather than sell to investors nearly doubled. But the Calabasas-based mortgage lender also raised the low end of its full-year earnings forecast.

Countrywide reported net income of $566.5 million (92 cents per diluted share) for the second quarter ended June 30, compared with $786.5 million ($1.29) for the like period a year earlier. Revenue fell 7 percent to $2.3 billion from $2.5 billion in the comparable period of the prior year.

Analysts expected a second-quarter profit of 99 cents per share on revenue of $2.5 billion.

As Countrywide reported in mid-July when it warned that its second-quarter profit may not meet investors' expectations, the company retained $15.7 billion in loans it produced in the quarter, compared with the $8.5 billion, an increase of 85 percent. It also held on to $1.8 billion in home-equity loans. Countrywide said the loan retentions cut into its profits, eliminating a potential $150 million pre-tax gain, or 15 cents per diluted share.

Over the longer term, a significant gain in loan retention could spell future trouble for Countrywide if it signifies that investors who take the loans off the company's books are getting skittish about exposure to the heated U.S. real estate market. That would crimp the company's ability to originate new loans.

This was not an issue in the second-quarter, however, with the company reporting that loan production rose 21 percent to $121.1 billion, boosted by falling long-term interest rates. That left Countrywide's with a servicing portfolio of $964 billion, an increase of 33 percent from a year earlier. It also ended June with a $77 billion mortgage loan application pipeline.

Total assets at the bank jumped 141 percent to $65.5 billion. However, mortgage banking pretax profit fell 48 percent to $526.4 million, from $1 billion for the second quarter of 2004. That more than eliminated a pretax profit from its Countrywide Bank and Countrywide Warehouse Lending unit and other operations that rose 111 percent to $251.2 million.

Countrywide said it now expects full-year earnings of $3.85 to $4.60 per share, up from previous guidance of $3.60 to $4.60. Analysts on average forecast earnings of $4.21 per share.

Shares of Countrywide were down 1.9 percent to $35.91 in afternoon trading.

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